UK central bank hops on fintech bandwagon

The Bank of England (BOE) has thrown its considerable weight behind the nascent fintech ‘reformation’ with a five-point action plan to encourage and guide financial innovation.

Mark Carney, BOE governor, laid out the five-point fintech mission in a speech drafted for a banker’s gathering in London last Thursday. (However, Carney instead delivered a tribute to murdered Labour MP, Jo Cox, at the event.)

As well as introducing a raft of initiatives in existing BOE operations, the UK central bank also launched a ‘FinTech Accelerator’ program as part of the action plan last week.

“The Accelerator will work with new technology firms to help us harness FinTech innovations for central banking,” Carney said. “In return, it will offer firms the chance to demonstrate their solutions for real issues facing us as policymakers, together with the valuable ‘first client’ reference that comes with it. With time, the Accelerator will build a network of firms working in this space for the benefit of us and them alike.”

To date the BOE has embarked on fintech explorations with a number of external companies including data specialists BitSight and Privitar as well as global consultancy firm PWC.

“We have invested in understanding the technology of blockchain and distributed ledger, working with PWC,” the BOE says. “The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology.”

In his speech, Carney said fintech could either completely overturn the current financial order, or possibly reinforce the power of incumbents as they co-opt the technology.

“The balance of these forces may yield a third alternative – a reformation – a more diverse, resilient and effective system for consumers,” he said. “One where large banks exist alongside new entrants who compete across the value chain.”

While the BOE governor said fintech could deliver a more efficient, consumer-friendly financial system, there were a number of risks to consider.

For example, Carney said if fintech “encourages herding on common information, trading positions could become more correlated”.

“And if switching costs in funding markets fall, liquidity risk could rise and systemic risks grow,” he said. “Indeed, sometimes when I hear of democratising finance, spreading risk in capital-light originate-to-distribute models, I think I haven’t been this excited since the advent of sub-prime.”

According to Carney, the full impact of fintech on BOE operations and the wider financial system would probably take a long time to play out.

“Many of the technologies needed to deliver such transformations are nascent – their scalability and compatibility untested beyond Proofs of Concept. Moreover, the bar for displacing incumbent technologies is very high,” he said. “Nor will the Bank of England take risks with the resilience of the core of the system. Disruption won’t come either easy or cheap.”

In addition to the Accelerator program, the BOE fintech ‘transformation’ plan covers:

Providing access to central bank money for new forms of wholesale securities settlement such as using a ‘distributed ledger’ (or blockchain) approach for bank loans, equities etc;

Exploring the use of distributed ledger technology in core BOE activities, including the operation of real-time gross settlement system; and,

Calibrating its regulatory approach to fintech developments.

Over the last year a number of global financial regulators have developed fintech policies to keep pace with the rapidly-developing sector. For example, last week the Australian Securities and Investments Commission (ASIC) published regulatory ‘sandbox’ relief proposals for fintech start-ups.

The ASIC policy mirrors a similar approach adopted by UK counterpart, the Financial Conduct Authority, last year.